The noise around CalPERs’ private equity debacle unveiled a very unsettling, yet unsurprising, fact: there is not enough transparency in the managed funds industry. With alternative investments estimated to be a monstrous $8 Trillion industry, the world of managed funds has been the target of negative perception due to a lack of transparency. Hyper competition in the industry is what fund managers may attribute the seemingly impenetrable network of backroom deals and secrecy. Unfortunately, this opacity has simultaneously created a veil for imperfections across risk controls and activity by managers that were directly misaligned with the interests of their investors.
There’s no doubt that the managed funds can use more transparency with their investors. This is becoming even more crucial as we see an increase in allocations to alternative investments in investment portfolios. If we want the alternative investment industry to continue its continued growth, trust and transparency are important more than ever in achieving investor trust and funding. So what are some ways that help increase investor and manager trust levels?
Maintain Regular Client Communications
Regular and ongoing communication with investors is key for not only securing investor capital, but also for building long-term relationships. Communications are critical particularly when the market is facing systematic challenges or specific investments are underperforming. Investors want and need to understand why an investment may be underperforming and what it means for their portfolio. This establishes trust and investment transparency that allows investors to make better decisions and develop a better overall rapport with their fund managers.
Be Open About Discussing Management Fees
There are managers and advisors that are uncomfortable with discussing fees with their investors. This arises from the belief that clients would have doubts as to whether or not a specific opportunity would be profitable enough to offset costs. However, it is often in the investor’s best interests for managers to generate profits and incentive fees. This should be conveyed to potential investors to allay any concerns about management fees.
A clear and comprehensive discussion around fees should be a regular part of setting expectations with investors and is likely one of the more critical components of establishing trust with investors.
Implement Real Time Performance Information
With the introduction of digital tools and the amount of information we all have at our fingertips, investors are increasingly becoming accustomed to real time information. Today’s investors are used to receiving real time information on banking, stocks, ETFs and other investments. Thus, an even higher level of access for higher-cost alternative investments is a must. Asset managers should invest in these types of tools to acquire younger investors accustomed to accessible information. Information accessibility will likely become a ubiquitous tool across the industry of alternative investments.
But, Transparency Isn’t Free
It should be well recognized by investors that greater transparency is not without its own costs. This requires greater operational transparency and reporting infrastructure in order to develop and report data and robust analytics. In order to meet this demand and offset the cost of transparency, asset managers will have to charge higher management fees.
According to a recent survey by Northern Trust Hedge Fund Services, approximately 50% of investors indicated that they needed more transparency. However, only 45% of those in North America, and a lesser percentage in Asia, Europe and the Middle East, were willing to pay a 1-3% basis point increase in management fees in exchange for more transparency. This reflects a direct disconnect between an understanding of the costs of transparency and the desire to be able to have a clearer view into the management of hedge funds. Historically, this operational freedom and lesser regulatory oversight have been opportunities for hedge funds to generate outsized returns. Increased costs of operation and reporting will naturally decrease returns for investors, but will have an overall beneficial effect in attracting new investors who desire transparency and establishing more trust with existing investors.
DarcMatter is one such platform that aims to bring transparency in the capital raising process and investor communication realm. Asset managers who wish to implement more transparency within their funds and with their investors can do so with the fintech solutions that exist today. But one thing is for sure- transparency is needed and it will come at a price.
DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. Visit DarcMatter.com to start raising capital or get transparent access to alternative investment opportunities.Visit DarcMatter